Twelve years of reforms have not been able to change the explicitly industrial nature of the Russian economy

The Expert 400 reveals that the structure of the Russian economy has not undergone any visible qualitative changes during the years of reform. At the very least, in big business. Industrial companies form the backbone of the rating. 266 industrial companies are represented in the Expert 400. In 2003, they were responsible for almost 74% of sales by companies in the rating (see chart 2). These results contrast sharply with the structure of the GDP presented in official statistics. According to the State Statistics Committee, the service industry’s contribution to the GDP has almost doubled since the early 1990s, reaching 59.8% in 2003, while goods manufacturing’s share fell by 40.2%. This would lead one to believe that a post-industrial economy has been flourishing in Russia for quite some time.

Doubts regarding the real structure of Russia’s GDP were first expressed by the World Bank in its February 2004 publication, “Report on the Russian Economy.” According to World Bank analysts, industrial production’s share in the GDP has been reduced due to the transfer pricing schemes practiced at nearly all Russian industrial holdings. As a result, the actual finances of industrial companies move through the corporations’ trading and management companies. The Statistics Committee considers these transactions wholesale trade operations, which increases the share of services in the GDP. The actual contribution of the industrial sector to the GDP, according to the World Bank, significantly exceeds 50%. Our rating fully confirms the World Bank’s assumptions.

Industrial companies dominate due to the extremely high degree of concentration of big business (see chart 3). Income distribution in the Expert 400 remained practically unchanged from last year’s rating. The first forty companies are responsible for 70.5%, while last year the top ten companies of the Expert 200 earned 71.9%. A similar picture emerges with geographic distribution. Interregional holding companies with their main company located in Moscow are responsible for two thirds of the total income of companies in the Expert 400. The inclusion of non-industrial companies in the rating naturally affected the top twenty largest companies in Russia, but in general did little to challenge the ascendancy of natural resource giants.

This year, the oil and metal companies that have become permanent fixtures among the top 20 companies in terms of earnings were joined by Russian Railways, Sberbank, Svyazinvest, Sistema, and Transneft. The railway company, created on the basis of MPS only in the latter half of last year, immediately jumped to second place, pushing LUKoil and UES down to third and forth places respectively. The manufacturing and processing industries have traditionally been represented by only AvtoVAZ (13th place). Thus, petroleum and metals have retained their majority in the top 20. Almost the same picture can be seen among the top 20 most profitable companies in Russia.

The distribution of income among the twenty leaders approached European levels by 2004 and was almost identical to Italy’s (see chart 5).

While among the top 20 the potential for further reductions in concentration has been practically exploited to its fullest, there is still more to be done in the economy as a whole. Russia takes the prize for the highest concentration of business, beating out even Japan. The Russian economy has no hope of achieving European or American levels in the foreseeable future. Reaching Japanese levels is merely a question of time. Even record prices for oil and steel will not allow oil companies and metal producers to outpace cellular providers or retailers.

These rival industries, moreover, have plenty of unexploited resources. In general, natural resource giants have already consolidated (for example, Gazprom’s takeover of Rosneft will only lead to a 12% increase in earnings). In retail and food production, consolidation is capable of increasing sales in proportion to the number of mergers. In the next few years, today’s leaders could see a major challenge from those companies currently taking 81st to 160th place. These companies are currently experiencing the highest growth rates. The strongest contenders: companies from the processing industries and representatives of the new economy (see chart 4).

Read also: The Expert 400: An infrastructural slowdown
To be continued...